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Dow Theory Update For September 16: Gold And Silver Set Up For Primary Bull Market Signal

|Includes:DIA, GDX, GLD, IYT, SIL, SLV, SPDR S&P 500 Trust ETF (SPY)

Secondary reaction for GDX and SIL signaled today

Well, today there relevant events under Dow Theory for the precious metals universe. Let's get started.

US Stocks

The SPY, the Industrials and Transports closed up. However, and while not strictly Dow Theory, I saw today many stocks failing to follow the bullish indices. I'd say that weakness is building up in the very short term.

The primary trend is bullish, as explained here, and more in-depth here.

The secondary is bearish, which implies an ongoing secondary reaction against the primary bullish trend, as explained here.

Today's volume was higher than Friday's, which is bullish as higher prices were met by higher volume. The overall pattern of volume remains neutral, since bullish and bearish volume days alternate and I cannot discern a clear pattern.

Gold and Silver

SLV and GLD closed down. For the reasons I explained here, I feel the primary trend remains bearish. Here I analyzed the primary bear market signal given on December 20, 2012. The primary trend was reconfirmed bearish, as explained here. The secondary trend is bullish (secondary reaction against the primary bearish trend), as explained here.

Today SLV closed 11.23% below the secondary reaction closing high of 23.59 (made on August 27th). GLD closed 7.53% below the secondary reaction closing high of 136.75 (made on the same date). Here you have the detailed calculations:



Sec Reac high 23.59 136.75
Pullback low 20.94 126.45
Decline -0.112335735 -0.07531993

Accordingly, the current pullback qualifies under Dow Theory to set up both precious metals for a primary bull market signal. As you know, according to the Dow Theory, the minimum pullback to be relevant must exceed 3%. However, given SLV and GLD's higher volatility, we have to make the corresponding volatility adjustments. To this end, I have calculated the daily percentage change for our three markets (SPY, as benchmark, and SLV and GLD) and have averaged for the last 100 days. These are the results:




SPY 0.0053   SPY 0.0053
SLV 0.016792   GLD 0.0101
Mult 3.16830189   Mult 1.90566038
Min mov 9.50490566   Min mov 5.71698113

Thus, the 11.23% (NYSEARCA:SLV) and 7.53% (NYSEARCA:GLD) pullback clearly exceeds the minimum movement of 9.50% (SLV) and 5.71% (GLD).

Look at the chart below. The blue big rectangle shows the ongoing bullish secondary reaction against the still in force primary bear market. The orange rectangle shows the current pullback.



Things get interesting: SLV and GLD set up for a primary bull market

So now things get interesting for silver and gold. If the secondary reaction closing highs were jointly broken (shown by the blue horizontal lines), then a primary bull market would be signaled.

If, on the other hand, the primary bear market lows (red horizontal lines at the bottom of each chart) were violated, then the primary bear market would be reconfirmed.

A moment of truth is approaching for GLD and SLV. Either the vicious bear market grip is broken, or let's get prepared for the worst…

SIL and GDX closed down. SIL and GDX, unlike GLD and SLV, are unambiguously in a primary bull market under the Dow Theory, as explained here and here.

The secondary trend has turned bearish, as there is an ongoing secondary reaction against the primary bullish trend. The two requirements for a secondary reaction have been met:

a) More than 10 days of declining prices. We have had 14 trading days of lower prices.

b) The pullback exceeds the minimum volatility threshold.

Here you have the calculations I have performed to obtain the minimum volatility adjusted movement:




SPY 0.0053   SPY 0.0053
SIL 0.0233   GDX 0.0255
Mult 4.39622642   Mult 4.81132075
Min mov 13.1886792   Min mov 14.4339623

And here you have the amount lost during the current secondary reaction:




Bull market high 16.37 30.41
Sec react low 13.66 25.29
Decline -0.16554673 -0.16836567

Thus, SIL's decline of 16.5% exceeds the minimum amount of 13.18% whereas GLD's decline of 16.83% exceeds the minimum amount of 14.43%.

Accordingly, today we label the secondary trend as bearish.

Here you have un updated chart displaying the ongoing secondary reaction (orange rectangles):



Secondary reaction for SIL and GDX signaled today


The Dow Theorist